Global and regional stock market integration in Asia: a panel convergence approach

Abstract

This paper examines global and regional stock market integration in Asia at both the aggregate and disaggregate (industry) levels by applying the Phillips-Sul (2007) tests for panel and club convergence. Over both the whole sample (1998m12–2018m3) and the two sub-sample periods (i.e., pre- and post-2008 global financial crisis periods), the Asian stock markets appear to be integrated both globally (vis-à-vis the US) and regionally (vis-à-vis Asia) at the aggregate level, although the speed of convergence has decreased after the crisis. The industry level convergence tests reveals that, notwithstanding the aggregate convergence, there are 3 (i.e., Gas & Oil, Healthcare and Technology) out of 10 industries not exhibiting panel convergence in any sample period; further, no convergence is found for Basic Materials and Consumer Services in the pre-crisis period and Telecommunications and Utilities in the post-crisis period. The club convergence tests show this was due to the existence of convergence clubs, clubs in the turn-around phase, and divergent economies in these industries. Global and regional integration exhibited similar patterns in most cases, although the former appears to be stronger than the latter in the post-crisis period. We also find that trade linkages and stock market development promote Asia's regional stock market integration but not its global integration; real interest rate differentials and the recent financial crisis have slowed down both regional and global integration, while exchange rate risk and openness only affect the former.